Fed Chairman Bernanke punted back to Congress in his Jackson Hole speech this afternoon. Much has been made today of the relative lack of “anything new” in his talk at the annual gathering of monetary aficionados in Wyoming. There was no QE3 announced, and Bernanke simply reaffirmed his commitment to the markets by using “a range of tools that could be used to provide additional monetary stimulus” if needed (which James Groth covered earlier on this blog). However, what stood out to me was Bernanke’s closeted call for more fiscal stimulus. Basically he punted right back to Congress as if he was playing Canadian football (video below). Here are some excerpts from the end of his talk:
Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view… Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.
That is the quintessential argument for fiscal stimulus, a fact surely not lost on the Federal Reserve chairman. Still he goes on to cite the importance of curbing debt and deficits:
To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.
Unfortunately, this is just an aside in his subtle plea for Congress to pick up and carry the ball forward towards a government-led economic recovery:
Acting now to put in place a credible plan for reducing future deficits over the longer term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives.
Fiscal policymakers can also promote stronger economic performance through the design of tax policies and spending programs. To the fullest extent possible, our nation’s tax and spending policies should increase incentives to work and to save, encourage investments in the skills of our workforce, stimulate private capital formation, promote research and development, and provide necessary public infrastructure.
Obama, Pelosi, and Reid could not have argued for more spending programs or against spending cuts better if they tried—and they have tried actually.
The White House and Congress have been punting to the Fed on ensuring a recovery for a while by ignoring the need for tax reform, entitlement reform, and housing policy reform. Now the Fed is kicking back. Bernanke and the FOMC made a big step at the last meeting by announcing zero interest rate policy would continue until 2013. He’s hoping Congress will step in so he doesn’t have to do QE3.
I hope he isn’t holding his breath though. As a terrible an idea as it would be, I imagine QE3 will be announced by the end of this year of the economy continues to spiral downward and unemployment gets worse.